More and more entrepreneurs are choosing to form Limited Liability Companies. These people want the protection provided by the corporate structure, without some of the formalities associated with corporations. While LLCs can provide the best of both worlds, most who enter this structure forget the most important element: operating agreements.
When an LLC has elements of a partnership, you should always draft an operating agreement that defines the relationships between its members. For instance, the members of an LLC each contribute seed capital to launch the business enterprise and expect corresponding shares in the venture. Since, unlike a corporation, an LLC does not issue shares, the only document that can memorialize the ownership interest of each member is the operating agreement.
You should always consider consulting an attorney to help you draft a thorough operating agreement. In addition to outlining the ownership relationship of the members, this document can and should identify the organizational structure of the company, the management of day to day affairs, the voting rights of the members, compensation and distribution of cash, and transfer of ownership interest if a member decides to sell, gets divorced, or becomes incapacitated. Other members will almost always want to have right of first refusal should a named member decide to transfer their ownership interest. Finally, provisions that account for the dissolution, liquidation, bankruptcy, default by failure to perform, and indemnification (in case of lawsuits) are necessary for any and all operating agreements.
New business ventures usually start with the best of intentions and with its members on the best of terms. An operating agreement is the necessary tool to help keep relationships among members both professional and friendly.